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Interim Condensed Financial Report - Contents Page Board of director s report 3-4 Independent auditor s report on review of interim condensed financial report 5 Summary of unaudited results 6 Interim condensed statement of comprehensive income 7 Interim condensed statement of financial position 8 Interim condensed statement of changes in equity 9 Interim condensed statement of cash flows 10 Notes to the interim condensed financial report 11-29 Presentation of Information This document comprises the Interim Condensed Financial Report for HSBC Bank Oman S.A.O.G. (formerly Oman International Bank S.A.O.G.) ( the Bank ). It contains Unaudited Interim Condensed Financial Statements, together with the Board of Directors Report, the Auditor s review report and the Summary of Unaudited Results. 2
Board of Director s Report on the three months results (unaudited) for the period ended 31 March 2013 Dear Shareholders, Ten months have passed since HSBC Bank Oman S.A.O.G. ( HBON ) was formed as result of the merger between Oman International Bank S.A.O.G. ( OIB ) and HSBC Middle East Ltd. s ( HSBC Oman ) operations in Oman. 2012 was a year of investment, integration and streamlining two complex banking institutions into a more robust bank positioned for growth and sustainable shareholder returns. The first quarter of 2013 has been focused on improving our product proposition and training our frontline staff while improving and standardising our operations to improve the overall HBON banking experience for our customers. During the quarter, HBON has also completed an Internal Operational Compliance Certification whereby all businesses functions have certified that as of 31st March 2013 the bank is operationally compliant with HSBC Group standards. Furthermore, we have successfully brought more than 160 new corporate clients onto HSBCnet, our business internet banking platform. It gives me great pleasure to present you with HBON s first quarter financial results. Performance Summary As per the International Financial Reporting Standards 3 ('IFRS 3') 'Business Combinations' requirements, the Profit and Loss ('P&L') of HBON for the first quarter of 2013 represents three months of HBON s results against the results of HSBC Oman for the same period of the previous year. HBON s robust financial performance demonstrated management s commitment to the success of the merged entity, reporting a 91% increase in Net profit for Q1 2013 to reach RO5.7m compared to RO3.0m for the same period in 2012. Net interest income ( NII ) increased by 124% for the period ended 31st March 2013 to reach RO11.6m from RO5.2m for the same period last year. Net Fee and other income are also up by 61% to RO3.1m compared to RO1.9m in 2012. Net Exchange income stood at RO1.8m, representing a 44% increase in comparison to RO1.3m for the same period last year. A net recovery of RO2.5m has been reported as Loan Impairment Charges for the period against a net charge of RO0.2m in Q1 2012. This was due to a recovery of RO1.6m from one corporate client and a general provision release of RO1.2m due to reduction in corporate advances which partly got off set by net charge of RO 0.3m in Retail loans. Operating expenses increased by 167% to RO12.3m compared to RO4.6m in Q1 2012 due to high running costs of the merged bank. Loans and advances net of provisions and reserved interest as at 31st March 2013 reported an increase of 119% to reach RO1,064.8m compared to RO485.2m as at 31st March 2012. Customer deposits increased by 155% to RO2,115.5m compared to RO828.9m as at 31st March 2012. This increase in Loans and Advances and Customer Deposits is mainly due to the business combination. The Capital Adequacy ratio stood at 17.6% as at Q1 2013 compared to 16.4% in 2012, representing a strong capital base for future growth. Branch Network Strategy Since HBON was formed in June 2012, senior management has completed a comprehensive branch review resulting in the segmentation of the network into three categories Flagship, Mid-Market and Community. The review was designed to ensure all branches are strategically placed to serve our customers and look for synergies between branches to optimise locations. As a result, we have decided to close down four branches (Ruwi, Qurum, Sohar and Thumrait Air Base) as they were all in close proximity to other HBON branches. We remain focused on improving career development and employment opportunities for Omani nationals, managing operational risks in the branch network, ensuring the branch network operates more efficiently and establishing a solid foundation to serve our customers more effectively. We have created six new senior roles; these positions will be responsible for coordinating each regional branch network and delivering on our strategy in Oman.. 3
In addition, and in line with our commitment to maintaining a strong focus on Risk and Compliance, we have also created six new senior operational roles across the regions to ensure we comply with local and global regulations and standards. The twelve regional roles will join the HBON senior executive management team. Staff Training and Development One of our top priorities is to improve the quality of customer service in order to further enrich the overall HBON banking experience for our customers. We believe that in today s highly competitive market, customer satisfaction is vital for retaining and developing our existing customer base, attracting new customers and building long lasting relationships that are founded on transparency and trust. To facilitate this journey, the bank has focused its efforts on providing frontline staff with the necessary tools, skillsets and learning materials that will enable them to serve customers with the highest standards of professionalism and care. In line with this strategy of Frontline First, HBON has begun introducing a series of training initiatives in 2013 the first of which was an accredited three day Customer Service Representative Workshop that combined operations, systems and product knowledge training. The interactive programme was structured to empower our frontline employees and their ability to contribute to the bank s success and be part of realising HBON s goal of becoming the best bank in Oman and the best place to work. ATM Network Upgrade and Replacement To increase the convenience of our retail banking customers, HBON has completed the installation of state-ofthe-art multifunction ATMs that offer cash withdrawal and deposit functions on one single platform and allow customers to transfer funds between HSBC accounts, make credit card and utility payments and view mini statements. Today, the bank operates more than 130 ATMs across Oman that are connected to the OmanNet National Switch Network. This connection also enables customers to use any ATM in the Sultanate. HBON has also identified five new locations to install ATMs which are due to be functional and ready for use during the second quarter of 2013. In conclusion, and on behalf of myself and the Board of Directors, I would like to thank all our customers, staff and management for their steadfast commitment. Special thanks also go to the Central Bank of Oman and the Capital Market Authority for their continued support and guidance. I wish to express our deepest appreciation to His Majesty Sultan Qaboos Bin Said for the peace, stability and growth that his wise leadership has brought Oman and its people. We offer our full support as he continues to lead the Sultanate to further prosperity and development. Simon N Cooper Chairman 4
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Summary of unaudited results for the period ended 31 March 2012 RO 000 RO 000 Change (%) Loans and advances net of provisions and reserved interest 1,064,840 485,213 119% Customer deposits 2,115,571 828,968 155% Net assets 299,230 117,220 155% * Net assets per share 0.150 0.120 25% Three months period ended Three months period ended Change (%) 31 March 2012 RO 000 RO 000 Net interest income 11,609 5,172 124% Net profit for the period 5,742 3,000 91% ** Earnings per share (annualised) 0.011 0.012 (8%) *** Capital adequacy ratio (CAR) 17.65% 16.41% 8% Comparative information presented is that of HSBC Bank Middle East Limited Oman branches as being the accounting acquirer and as a result of application of IFRS 3 - Business Combinations as discussed in note 2 (c) * Net assets (book value) per share is calculated by dividing the net assets (book value) at 31 March by the average number of ordinary shares in issue at 31 March. ** Earnings per share (annualised) have been calculated by dividing the net profit after tax attributable to ordinary shareholders for the period ended 31 March by the average number of ordinary shares in issue for the period. ***Capital adequacy ratio has been calculated in accordance with the Basel Capital Adequacy Accord. The ratio represents the ratio of risk weighted assets to capital. 6
Unaudited interim condensed statement of comprehensive income for the three months period ended (refer note 5) Three months ended 31 March 2013 Three months ended 31 March 2012 Notes RO 000 RO 000 Interest income 6 14,799 6,313 Interest expense 7 (3,190) (1,141) Net interest income 11,609 5,172 Net fee income 3,000 1,912 Net exchange income 1,816 1,260 Dividend income 77 - Other operating income 24 16 Net operating income before loan impairment charges and other credit risk provisions 16,526 8,360 Loan impairment (charges) and other credit risk provisions - net of recoveries 8 2,520 (221) Net operating income 19,046 8,139 Operating expenses 9 (11,705) (4,616) Amortisation and impairment of intangible assets 10 (571) - Total operating expenses (12,276) (4,616) Profit before tax 6,770 3,523 Tax expense (1,028) (523) Profit for the period 5,742 3,000 Other comprehensive income/(expense) Fair value gain on available-for-sale investments 1,283 98 Effect of currency translation 167 - Income taxes on fair value gain on available-for-sale investments (99) (12) 1,351 86 Total comprehensive income for the period 7,093 3,086 Earnings per share - basic 11 0.011 0.012 The accompanying notes on pages 11 to 29 form an integral part of these interim condensed financial statements. 7
Unaudited interim condensed statement of financial position as at (refer note 5) (refer note 5) Audited At 31 March At 31 March At 31 December 2013 2012 2012 Notes Assets Cash and balances with central banks 248,230 46,791 120,540 Due from banks 194,563 117,924 183,858 Loans and advances to customers - net 12 1,064,840 485,213 1,194,443 Financial investments 13 896,324 329,958 680,672 Other assets 14 112,584 64,049 188,577 Intangible assets 15&5 14,093-14,664 Property, plant and equipment 16 30,550 1,433 30,062 Total assets 2,561,184 1,045,368 2,412,816 Liabilities and equity Liabilities Due to banks 34,151 20,939 46,170 Deposits from customers 17 2,115,571 828,968 1,851,567 Other liabilities 18 112,232 78,241 220,942 Total liabilities 2,261,954 928,148 2,118,679 Equity Share capital 23 200,031 98,015 200,031 Legal reserve 24(a) 32,673 32,093 32,673 Statutory reserve 24(b) 1,252 1,019 1,236 Merger reserve 24(c) - (84,112) - Available-for-sale fair value reserve 24(d) 2,819-1,635 Retained profits 62,455 70,205 58,562 Total equity 299,230 117,220 294,137 Total equity and liabilities 2,561,184 1,045,368 2,412,816 Net assets per share RO 0.150 RO 0.120 RO 0.147 Off-balance sheet items: Contingent liabilities and commitments - Documentary credits 177,355 144,565 86,782 - Guarantees 257,208 205,898 334,677 - Others 19 957,640 564,851 1,114,228 1,392,203 915,314 1,535,687 The accompanying notes on pages 11 to 29 form an integral part of these interim condensed financial statements. The interim condensed financial statements were authorised for issue on 29 April 2013 in accordance with the resolution of the Board of Directors. Simon N Cooper Chairman Ewan Stirling Chief Executive Officer 8
Unaudited interim condensed statement of changes in equity for the three months period ended Share capital Legal reserve Statutory reserve Available-for-sale fair value reserve Merger reserve Retained profits Total RO 000 At 1 January 2012 (refer note 5) 96,805 32,093 973 - (82,856) 67,119 114,134 Total comprehensive income for the period - Profit for the period - - - - - 3,000 3,000 Other comprehensive income / (expense) for the period Effect of currency translation - - 46 - (46) - - Net movement in fair value of available-for-sale investments - - - - 86 86 Total other comprehensive income for the period - - 46 - (46) 86 86 Total comprehensive income for the period - - 46 - (46) 3,086 3,086 Transaction with shareholders, recorded directly in equity Stock dividend issued for 2011 1,210 - - - (1,210) - - At 31 March 2012 98,015 32,093 1,019 - (84,112) 70,205 117,220 At 1 January 2013 200,031 32,673 1,236 1,635-58,562 294,137 Total comprehensive income for the period Profit for the period - - - - - 5,742 5,742 Other comprehensive income for the period Effect of currency translation - - 16 - - 151 167 Net movement in fair value of available-for-sale investments - - - 1,184 - - 1,184 Total other comprehensive income for the period 16 1,184-151 1,351 Total comprehensive income for the period - - 16 1,184-5,893 7,093 Transaction with shareholders, recorded directly in equity Dividend paid for 2012 - - - - - (2,000) (2,000) At 200,031 32,673 1,252 2,819-62,455 299,230 The accompanying notes on pages 11 to 29 form an integral part of these interim condensed financial statements. 9
Unaudited interim condensed statement of cash flows for the three months period ended (refer note 5) Three months ended 31 March 2013 Three months ended 31 March 2012 Note RO 000s RO 000s Cash flows from operating activities Profit before tax 6,770 3,523 Adjustments for: non-cash items included in profit before tax (1,333) 291 change in operating assets 208,116 (28,331) change in operating liabilities 154,266 78,506 tax paid - (2,044) Net cash generated from operating activities 367,819 51,945 Cash flows used in investing activities Purchase of financial investments (1,423,022) (560,000) Proceeds from maturity of financial investments 1,208,554 534,780 Purchase of property, plant and equipment (1,060) (31) Effect of currency translation 123 - Net cash used in investing activities (215,405) (25,251) Cash flows from financing activities Dividends paid (2,000) - Net cash used in financing activities (2,000) - Net change in cash and cash equivalents 150,414 26,694 Cash and cash equivalents at the beginning of the period 242,343 116,582 Cash and cash equivalents at the end of the period 28 392,757 143,276 The accompanying notes on pages 11 to 29 form an integral part of these interim condensed financial statements 10
1 Legal status and activities HSBC Bank Oman S.A.O.G. ( the Bank ), formerly Oman International Bank S.A.O.G. ( OIB ), is an Omani joint stock company, which was incorporated on 1 January 1979, operating as a commercial bank through a network of branches in the Sultanate of Oman, India and Pakistan. The registered office of the head office of the Bank is P.O. Box 1727, CPO Seeb, Postal Code 111, Sultanate of Oman. The Bank has its shares listed on Muscat Securities Market. As further explained in note 5, on 3 June 2012, the operations of HSBC Bank Middle East Limited, Oman branches merged with OIB and the combined listed entity was renamed as HSBC Bank Oman S.A.O.G. Following the merger, HSBC Bank Middle East Limited ( HBME ) holds 51% of the shares in the combined entity. HBME is a subsidiary of HSBC Holdings Plc. 2 Basis of preparation: (a) Compliance with International Financial Reporting Standards The interim condensed financial statements of the Bank have been prepared in accordance with IAS 34 Interim Financial Reporting ( IAS 34 ) as issued by the International Accounting Standards Board ( IASB ), the disclosure requirements set out in the Rules for Disclosure and Proformas issued by the Capital Market Authority ( CMA ), and the Commercial Companies Law of 1974, as amended, of the Sultanate of Oman and the applicable regulations of the Central Bank of Oman ( CBO ). The financial statements of the Bank at 31 December 2012 were prepared in accordance with International Financial Reporting Standards ( IFRSs ) as issued by the IASB, the disclosure requirements of CMA and the applicable regulations of the CBO. IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) and its predecessor body. (b) Presentation of information The functional currency of the Bank is Rials Omani ( RO ), which is also the presentation currency of the financial statements of the bank. (c) Comparative information These interim condensed financial statements include comparative information as required by IAS 34. As further explained in note 5, on 3 June 2012, the operations of HSBC Bank Middle East Limited, Oman branches merged with OIB. Following the merger, HBME holds 51% of the shares in the combined entity. The merger is accounted for as a reverse acquisition under IFRS 3 Business Combinations due to HBME acquiring a controlling stake in OIB through the issue of new shares by OIB. Accordingly, OIB is treated as the accounting acquiree and HSBC Bank Middle East Limited, Oman branches are treated as the accounting acquirer' for accounting purposes. As a result, the financial statements of HSBC Bank Oman S.A.O.G. are shown as a continuation of the financial statements of HSBC Bank Middle East Limited, Oman branches with one adjustment to reflect the legal capital and statutory reserves of OIB. 11
2 Basis of preparation (continued) (d) Use of estimates and assumptions The preparation of financial information requires the use of estimates and assumptions about future conditions. The use of available information and the application of judgement are inherent in the formation of estimates; actual results in the future may differ from those reported. Management believes that the bank s critical accounting policies where judgement is necessarily applied are those which relate to the valuation of separately identifiable assets and liabilities acquired during merger, the useful lives of intangible assets, impairment of loans and advances, the valuation of financial instruments and the impairment of available-for-sale financial assets. (e) Future accounting developments At, a number of standards and interpretations, and amendments thereto, had been issued by the IASB, which are not effective for these interim condensed financial statements. In addition to the projects to complete financial instrument accounting, the IASB is continuing to work on projects on insurance, revenue recognition and lease accounting, which together with the standards described below, could represent significant changes to accounting requirements in the future. Standards and Interpretations issued by the IASB Standards applicable in 2014 In December 2011, the IASB issued amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities which clarified the requirements for offsetting financial instruments and addressed inconsistencies in current practice when applying the offsetting criteria in IAS 32 Financial Instruments: Presentation. The amendments are effective for annual periods beginning on or after 1 January 2014 with early adoption permitted and are required to be applied retrospectively. The Bank is currently assessing these clarifications but it is impracticable to quantify their effect as at the date of approval of these financial statements. In October 2012, the IASB issued amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities, which introduced an exception to the principle that all subsidiaries shall be consolidated. The amendments require a parent that is an investment entity to measure its investments in particular subsidiaries at fair value through profit or loss instead of consolidating all subsidiaries in its consolidated and separate financial statements. The amendments are effective from 1 January 2014 with early adoption permitted. Based on our initial assessment, we do not expect the amendments to have a material impact on these financial statements. Standards applicable in 2015 In November 2009, the IASB issued IFRS 9 Financial Instruments ( IFRS 9 ) which introduced new requirements for the classification and measurement of financial assets. In October 2011, the IASB issued additions to IFRS 9 relating to financial liabilities. Together, these changes represent the first phase in the IASB s planned replacement of IAS 39 Financial Instruments: Recognition and Measurement ( IAS 39 ) with a less complex and improved standard for financial instruments. Following the IASB s decision in December 2011 to defer the effective date, the standard is effective for annual periods beginning on or after 1 January 2015 with early adoption permitted. IFRS 9 is required to be applied retrospectively but prior periods need not be restated. 12
2 Basis of preparation (continued) (e) Future accounting developments (continued) Standards and Interpretations issued by the IASB (continued) Standards applicable in 2015 (continued) The second and third phases in the IASB s project to replace IAS 39 will address the impairment of financial assets measured at amortised cost and hedge accounting. The IASB is in the process of amending the requirements for classification and measurement in IFRS 9 to address practice and other issues. In December 2012, the IASB added the requirements related to general hedge accounting, to IFRS 9 which align hedge accounting more closely with risk management and established a more principle-based approach to hedge accounting while address inconsistencies and weaknesses in the IAS 39 hedge accounting model. The revised hedge accounting requirements are effective for annual periods beginning on or after 1 January 2015 on a prospective basis. The requirements do not address macro hedge accounting, which is still being considered by the IASB. The Bank is currently assessing the impact of the hedge accounting draft standard. As a result of uncertainties with regard to the final IFRS 9 requirements for classification and measurement and impairment, the Bank remains unable to provide a date by which it will apply IFRS 9 as a whole and it remains impracticable to quantify the effect of IFRS 9 as at the date of the approval of these financial statements. 3 Accounting policies The accounting policies applied by the Bank in this interim condensed financial statements are the same as those applied by the Bank in its financial statements as at and for the year ended 31 December 2012 except for the adoption of IFRS 13 Fair Value Measurement. IFRS 13 has been applied prospectively from 1 January 2013. The disclosures requirements of IFRS 13 do not require comparative information to be provided for period prior to initial application. IFRS 13 establishes a single source of guidance for all fair value measurement required or permitted by IFRSs. The standard clarifies the definition of fair value as an exit price, which is defined as a price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market condition, and enhance disclosures about fair value measurement. The change had no material impact on the measurement of the Bank s assets and liabilities. However, the Bank has included new disclosures in these interim financial statements which are required under IFRS 13. 4 Products and services The Bank provides a comprehensive range of banking and related financial services to its customers. The products and services offered to customers are organised by global business. - Retail Banking and Wealth Management ( RBWM ) offers a broad range of products and services to meet the personal banking need, consumer finance and wealth management needs of individual customers. Typically, customer offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products and financial planning services). - Commercial Banking ( CMB ) product offerings include the provision of receivables financing services, payments and cash management, international trade finance, treasury and capital markets, commercial cards, insurance, cash and derivatives in foreign exchange and rates, and online and direct banking offerings - Global Banking and Markets ( GB&M ) provides tailored financial solutions to government, corporate and institutional clients. The client focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services; a markets business that provides services in credit, rates, foreign exchange, money markets and securities services; and principle investment activities. 13
5 Business combination On 3 June 2012, the operations of HSBC Bank Middle East Limited, Oman branches merged with OIB and the combined listed entity was renamed as HSBC Bank Oman S.A.O.G. As a result of the merger through the issue of new shares in OIB, HBME acquired 51% of the combined entity for a total consideration of RO 151.92m. As HBME acquired a controlling stake in OIB, the merger is accounted for as a reverse acquisition under IFRS 3. For accounting purposes, OIB is treated as the accounting acquiree and HSBC Bank Middle East Limited, Oman branches are treated as the accounting acquirer. Accordingly the financial statements of HSBC Bank Oman S.A.O.G. are shown as a continuation of the financial statements of HSBC Bank Middle East Limited, Oman branches with one adjustment to reflect the legal capital and statutory reserves of OIB. This adjustment was reflected in a merger reserve, which was adjusted against retained earnings as at 31 December 2012. The comparative information in these financial statements are those of HSBC Bank Middle East Limited, Oman branches, except for the legal capital and statutory reserves which are of OIB. The fair values of identifiable assets acquired and the liabilities assumed at 3 June 2012 were as follows: Fair value recognised on acquisition RO 000 Carrying value immediately prior to acquisition RO 000 Cash and balances with central banks 108,344 108,344 Derivatives 1,948 1,948 Due from banks 174,190 174,190 Loans and advances to customers net* 685,370 702,940 Financial investments 173,977 173,977 Other assets * 120,609 120,723 Prepayment and accrued income 1,120 1,120 Property, plant and equipment 31,405 37,038 Intangible assets core deposit 12,306 - Intangible assets customer relationships 3,691 - Deferred tax assets 3,868 950 Due to banks (21,281) (21,281) Deposits from customers (1,014,455) ( 1,015,555) Items in the course of transmission to other banks (4,519) (4,519) Derivatives (2,342) (242) Other liabilities (116,079) (116,079) Current tax liabilities (563) (563) Accruals and deferred income (4,428) (4,428) Total identifiable net assets 153,161 Total consideration transferred 151,923 Negative goodwill arising on acquisition (1,238) * For acquired receivables, the best estimate at the acquisition date of the contractual cash flows not expected to be collected are as follows: Gross contractual cash flow RO 000 14 Cash flow not expected to be collected RO 000 Loans and advances 746,335 60,965 Other assets 120,723 114
6 Interest income Interest bearing assets earned interest at an overall annualised rate of 2.81% for the three months period ended (31 March 2012-2.82 %). 7 Interest expense For the three month period ended, the average overall annualised cost of funds was 0.63% (31 March 2012 0.56 %). 8 Loan impairment charges and other credit risk provisions - net of recoveries Three months Three months period ended period ended 31 March 31 March 2013 2012 RO 000 RO 000 Provided during the period general (note 12) - (364) Provided during the period specific (note 12) (1,374) (219) Provisions released / written back (note 12) 3,108 61 Adjustments as a result of fair value unwind 58 - Reserved interest released (note 12) 222 51 Written-off loans recovered 520 250 Bad debts directly written off to statement of income (14) - 9 Other operating expenses Three months period ended 2,520 (221) Three months period ended 31 March 31 March 2013 2012 RO 000 RO 000 Employee compensation and benefits (5,203) (2,022) General and administrative expenses (5,886) (2,523) Depreciation of property, plant and equipment (616) (71) (11,705) (4,616) 10 Amortisation of intangible assets 15 Three months period ended Three months period ended 31 March 31 March 2013 2012 RO 000 RO 000 This represents amortisation of intangible assets as result of business combination accounted for as follows : Core deposits intangible (440) - Customer relationships (131) - (571) -
11 Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to the shareholders, being profit for the weighted average number of shares in issue, as follows: Three months period ended Three months period ended 31 March 31 March 2013 2012 Weighted average number of shares in issue ( 000) 2,000,313 980,153 Net profit for the period (RO 000) 5,742 3,000 Basic earnings per share annualised (RO) 0.011 0.012 12 Loans and advances to customers Under IFRS 3 Business Combinations, the acquirer does not recognise a provision for loan impairments on initial recognition of loans acquired in a business combination. The table below provides an analysis of loans and advances to customers as per the IFRS requirements. Overdrafts 89,492 14,871 90,702 Loans 977,749 465,196 1,101,998 Bills discounted / purchased 22,041 15,872 30,063 Gross loans and advances 1,089,282 495,939 1,222,763 Provision for loan impairment - specific (13,562) (3,315) (14,625) Provision for loan impairment - general (4,952) (6,008) (6,289) Reserved interest (5,928) (1,403) (7,406) Net loans and advances 1,064,840 485,213 1,194,443 To comply with the CBO regulations, the table below includes the provision for loan impairment on loans acquired in the business combination. Overdrafts 89,492 14,871 90,702 Loans 1,048,396 465,196 1,172,645 Bills discounted / purchased 22,041 15,872 30,063 Gross loans and advances 1,159,929 495,939 1,293,410 Provision for loan impairment - specific (36,539) (3,315) (37,602) Provision for loan impairment - general (14,943) (6,008) (16,280) Reserved interest (43,607) (1,403) (45,085) Net loans and advances 1,064,840 485,213 1,194,443 16
12 Loans and advances to customers (continued) The interest rate bands of gross loans and advances to customers are as follows: 0-5% 546,269 266,359 669,783 5-7% 250,083 149,842 233,229 7-10% 298,941 66,271 318,937 10-13% 48,555 3,966 54,844 more than 13% 16,081 9,501 16,617 1,159,929 495,939 1,293,410 Maturity analysis of net loans and advances to customers as per CBO circular BM 955 is as follows: 0-6 months 250,467 184,372 342,119 6-12 months 49,126 8,631 27,472 1-3 years 95,358 92,590 170,880 3-5 years 226,146 105,015 200,316 More than 5 years 443,743 94,605 453,656 1,064,840 485,213 1,194,443 17
12 Loans and advances to customers (continued) Concentration of loans and advances: Loans and advances to customers by industry sector Personal and consumer loans 417,432 109,238 421,211 Corporate and commercial Import trade 135,323 104,192 178,312 Construction 68,750 17,349 69,317 Manufacturing 173,463 83,809 187,219 Wholesale and retail trade 20,335 21,460 35,060 Export trade 5,489 6,735 7,737 Electricity, gas, water, transportation and communication 107,844 5,294 132,384 Services 135,806 106,928 161,293 Mining and quarrying 52,654 19,041 54,065 Others 36,436 21,866 40,422 736,100 386,674 865,809 Financial institutions 6,397 27 6,390 Total gross loans and advances 1,159,929 495,939 1,293,410 Provision for loan impairment - specific (36,539) (3,315) (37,602) Provision for loan impairment - general (14,943) (6,008) (16,280) Reserved interest (43,607) (1,403) (45,085) Net loans and advances 1,064,840 485,213 1,194,443 Non performing loans 88,867 5,152 92,445 Of the above gross loans and advances, loans totaling RO 14.1m are held for sale. Specific provision for loan impairment and reserved interest represent 90.2% of gross non-performing loans and advances. 18
12 Loans and advances to customers (continued) Provision for loan impairment and reserved interest: The movement on provision for loan impairment for the three months period ended is analysed in the table below: Specific General Total provision provision provision Balance at 1 January 2013 37,602 16,280 53,882 Currency translation effect on opening balance (11) - (11) Provided during the period (note 8) 1,374-1,374 Released during the period: -Due to recoveries/write back (note8) (1,771) (1,337) (3,108) Written off during the period (655) - (655) Balance at 36,539 14,943 51,482 The movement on provision for loan impairment for the three months period ended 31 March 2012 is analysed in the table below: Specific General Total provision provision provision Balance at 1 January 2012 3,445 5,644 9,089 Provided during the period (note 8) 219 364 583 Due to recoveries / releases (note 8) (61) - (61) Written off during the period (288) - (288) Balance at 31 March 2012 3,315 6,008 9,323 The movement on reserved interest for the period is analysed as below: 31 March 31 March 2013 2012 RO 000 RO 000 Balance at the beginning of the period 45,085 1,586 Reserved during the period 2,738 214 Released to the statement of income (note 8) (222) (51) Written off during the period (3,994) (346) Balance at end of the period 43,607 1,403 The estimated fair value of loans and advances is not materially different from the book value of loans and advances, other than as disclosed in note 5. 19
13 Financial investments Financial investments details are provided as follows: Fair value Fair value Fair value Carrying value Carrying value Carrying va 31 March 31 March 31 Decem 2013 2012 20 RO'000 RO'000 RO'000 RO'000 RO'000 RO'0 Marketable securities MSM Finance 2,207-2,092 2,207-2,0 Insurance 370-377 370-3 Services 397-405 397-4 Industrial 41-44 41 - Government bonds 48,272 29,948 47,998 48,272 29,948 47,9 Other bonds 220-220 220-2 51,507 29,948 51,136 51,507 29,948 51, Marketable securities Foreign by Sector Government securities 2,881-3,675 2,881-3,6 Foreign shares 3,469-3,111 3,469-3, 6,350-6,786 6,350-6,7 Unquoted and other investments Certificates of Deposits 825,007 300,010 610,0 Unquoted Omani shares 1,010-1,0 Investment fund units 12,450-11,7 838,467 300,010 622,7 Total 896,324 329,958 680,6 20
13 Financial Investments (continued) Details of classification of investments are given below: Available-for-sale (AFS) 896,324 329,958 680,672 Details of AFS investments are as follows: 896,324 329,958 680,672 Cost of: Quoted - Foreign Government securities 2,881-3,675 Quoted - Equity and other securities 889,383 329,460 674,669 Unquoted investments 1,010-1,010 893,274 329,460 679,354 Revaluation gain of: Quoted - Equity and other securities 3,050 498 1,318 896,324 329,958 680,672 14 Other assets Derivatives - positive mark to market 959 1,408 2,108 Prepayments and accrued income 1,236 742 960 Deferred tax asset 4,324 1,099 4,515 Acceptances 73,778 60,504 136,646 Others 32,287 296 44,348 112,584 64,049 188,577 15 Intangible assets Customer relationships 3,691-3,691 Core deposits 12,306-12,306 15,997-15,997 Less: amortised (1,904) - (1,333) 14,093-14,664 21
16 Property plant and equipment During the period, an amount of RO 1.1m was added in the property plant and equipment (March 2012 RO 0.31m). 17 Deposits Deposits details are as follows: Current and call 1,335,039 499,861 1,052,671 Savings 427,022 92,838 428,009 Time deposits 347,185 231,436 363,667 Others 6,325 4,833 7,220 2,115,571 828,968 1,851,567 Maturity analysis of customer deposits as per CBO circular BM 955 is as follows: 0-6 months 937,771 383,569 772,878 6-12 months 414,663 148,577 308,296 1-3 years 137,486 50,712 165,183 3-5 years 132,442 48,774 156,994 Over 5 years 493,209 197,336 448,216 2,115,571 828,968 1,851,567 The interest rate bands of deposits are as follows: 0-2% 1,985,088 819,565 1,729,891 2-4% 125,754 2,664 116,948 4-6% 588 6,739 694 6-8% 261-133 8-10 % 3,612-3,353 more than 10% 268-548 2,115,571 828,968 1,851,567 22
18 Other liabilities Derivatives - negative mark to market 2,189 1,401 3,221 Deferred tax liability 873-721 Retirement benefit liability 936 6,522 1,078 Acceptances 73,778 60,504 136,646 Tax liability 3,208 3,400 2,414 Accruals and deferred income 2,264 1,594 2,920 Others 28,984 4,820 73,942 112,232 78,241 220,942 19 Contingent liabilities, commitments and derivatives Forward forex contracts sales 40,316 40,557 131,533 Forward forex contracts purchases 42,250 40,565 133,100 Currency Swaps 136,066-136,479 Options - 2,566 3,594 Interest rate swaps 21,965 30,636 21,965 Undrawn unconditionally cancellable commitments 698,096 430,590 667,840 Undrawn unconditionally non-cancellable commitments 18,947 19,937 19,717 957,640 564,851 1,114,228 As at, there were certain legal suits pending against the Bank. Based on the opinion of the Bank s legal counsel, the Bank s management believes that no additional liability is expected to arise from these cases and it therefore does not consider it necessary to make any additional provisions in this regard. 23
20 Basis of valuing financial assets and liabilities measured at fair value Quoted market price Valuation techniques Using observable inputs With significant unobservable inputs Total Level 1 Level 2 Level 3 RO 000 At Assets Derivatives - 959-959 Financial investments: available-for-sale 9,298 886,016 1,010 896,324 Liabilities Derivatives - 2,189-2,189 At 31 March 2012 Assets Derivatives - 1,408-1,408 Financial investments: available-for-sale - 329,958-329,958 Liabilities Derivatives - 1,401-1,401 The carrying value of assets measured in level 3 of the fair value hierarchy approximates to fair value. There is no change in the fair value of these assets during the period (IFRS 13). There has been no change to the basis of valuation of level 2 and level 3 financial assets and liabilities disclosed in the latest audited financial statements of the Bank. 24
21 Asset liability mismatch The asset liability mismatch is based on CBO circular BM 955 and given as follows: Maturities Assets 31 March 2012 31 December 2012 Liabilities and equity Mismatch Assets Liabilities and equity Mismatch Assets Liabilities and equity Mismatch 0-6 months 1,557,592 1,083,762 473,830 699,850 482,977 216,873 1,415,849 1,046,295 369,554 6-12 months 93,985 420,753 (326,768) 16,296 151,576 (135,280) 46,012 308,287 (262,275) 1-3 years 137,379 137,486 (107) 95,206 50,712 44,494 217,297 165,177 52,120 3-5 years 261,810 132,442 129,368 137,480 48,774 88,706 214,111 156,994 57,117 more than 5 years 510,418 786,741 (276,323) 96,536 311,329 (214,793) 519,547 736,063 (216,516) 2,561,184 2,561,184-1,045,368 1,045,368-2,412,816 2,412,816-22 Exposure to credit risk Loans and advances (As per CBO) Due from banks Financial investments Individually impaired - non performing 88,867 5,152 92,445 - - - - - - Provision for loan impairment - specific and reserved interest (80,146) (4,718) (82,687) - - - - - - Carrying amount of non-performing 8,721 434 9,758 - - - - - - Past due and not impaired 43,310 4,459 21,471 - - - - - - Neither past due nor impaired 1,027,752 486,328 1,179,494 194 563 117,924 183,858 896,324 329,958 680,672 Allowance for collective impairment (14,943) (6,008) (16,280) - - - - - - Total carrying amount 1,064,840 485,213 1,194,443 194,563 117,924 183,858 896,324 329,958 680,672 25
23 Share capital The share capital of the Bank is divided into 2,000,312,790 fully paid shares of RO 0.100 each (31 March 2012 980,153,267 shares of RO 0.100 each) against the authorised share capital of 7,500 million shares of RO 0.100 each (31 March 2012 1,000 million of shares of RO 0.100each) Of the above share capital of the Bank ordinary shares of 1,020,159,523 were issued on 3 June 2012 to HBME as part of the merger with OIB (refer note 5). Major Shareholder All those shareholders of the Bank who own 10% or more of the Bank s shares in their name, and the number of shares they hold are as follows: 24 Reserves Number of shares Number of shares Number of shares 1 HSBC Bank Middle East Limited 1,020,159,523-1,020,159,523 2 H.E. Dr. Omar Bin Abdul Muneim Al Zawawi - 98,702,140 - (a) Legal reserve In accordance with the Commercial Companies Law of Oman 1974 as amended, annual appropriations of 10% of the profit for the year are made to the legal reserve until the accumulated balance of the reserve is equal to one-third of the value of the Bank s paid-up share capital. This reserve is not available for distribution. (b) Statutory reserve Regulations issued on 30 September 2000 by the authority regulating the banking activities in India, in which certain branches operate, require the branches to appropriate 25% of their profits for the year to a statutory reserve, which is not distributable without the prior permission of the regulatory authority. An earlier regulation issued on 27 March 1989, required the branches in India to appropriate 20% of their profits to a statutory reserve until the year 2000. (c) Merger reserve The merger reserve arises from the application of the principles of reverse acquisition accounting for the business combination of HSBC Bank Middle East Limited Oman branches and OIB in June 2012. In accordance with IFRSs the acquisition has been accounted for as a reverse acquisition as explained in note 5. (d) Available-for-sale fair value reserve Available-for-sale fair value reserve represents fair value changes in available-for-sale financial assets. 25 Related parties and holders of 10% of the Bank s shares Holders of 10% or more of the Bank s shares may include companies, individuals, or families. Families are included if the shares of the family members total 10% or more of the Bank s shares. Members of the family of an individual are those that may be expected to influence, or be influenced by, that person in their dealings with the Bank. Related parties also includes key management personnel and HSBC Group and related entities. Details are provided separately where amounts relating to an individual director and/or significant shareholder and his/her related parties are greater than 5% of the total of related party loans and advances. Others represent transactions with parties related to more than one director. 26
25 Related parties and holders of 10 % of the Bank s shares (continued) Analysis of the related party transactions with related parties or holders of 10% or more of the Bank s shares, ('significant shareholders') or their family members during the period is as follows: Significant shareholder - HSBC and related group entities Directors Key management personnel Others Total RO 000 RO 000 Loans and advances - - 220 16,941 17,161 Current, deposit and other accounts - 86-36,139 36,225 Letters of credit and guarantees - - - 7,852 7,852 Provision for loans and advances - - - - - Due from banks 32,889 - - - 32,889 Due to banks 15,336 - - - 15,336 For the period ended Net fee income 88 - - - 88 Other operating expenses: (2,883) (3) (666) (36) (3,588) Purchase of property and equipment - - - 19 19 Significant shareholder - HSBC and related group entities Directors Key management personnel Others Total 31 March 2012 RO 000 RO 000 Loans and advances - 145 145 Current, deposit and other accounts - - - - - Letters of credit and guarantees - - - - - Provision for loans and advances - - - - - Due from banks 3,910 - - - 3,910 Due to banks 6,291 - - - 6,291 For the period ended 31 March 2012 Net fee income - - - - - Other operating expenses (1,449) (490) (1,939) Related party loans and advances bear interest at rates between 3.25% p.a. to 8% p.a. Related party deposits bear interest at rates between 0.25% p.a.to 1.25% p.a. 27
26 Operating segments The factors used to identify the Bank s reporting segment are discussed in the financial statements for the year ended 31 December 2012. Geographical areas A geographical analysis of key financial data by location of primary assets as at is set out below: Oman Others Adjustments Total RO 000 Net operating income before loan impairment charges and other credit risk provisions 16,456 70-16,526 Loan impairment charges and other credit risk provisions net of recoveries 2,483 37-2,520 Net operating income 18,939 107-19,046 Total Operating Expenses (11,952) (324) - (12,276) Profit before tax 6,987 (217) - 6,770 Tax expense (954) (74) - (1,028) Profit for the period 6,033 (291) - 5,742 Loans and advances to customers (net) 1,064,266 574-1,064,840 Total assets 2,551,697 35,756 (26,269) 2,561,184 Deposits from customers 2,102,533 13,038-2,115,571 Total liabilities 2,255,939 15,709 (9,694) 2,261,954 A geographical analysis of key financial data by location of primary assets as at 31 March 2012 is set out below: Oman Others Adjustments Total 31 March 2012 RO 000 Net operating income before loan impairment charges and other credit risk provisions 8,360 - - 8,360 Loan impairment charges and other credit risk provisions net of recoveries (221) - - (221) Net operating income 8,139 - - 8,139 Total operating expenses (4,616) - - (4,616) Profit before tax 3,523 - - 3,523 Tax expense (523) - - (523) Profit for the period 3,000 - - 3,000 Loans and advances to customers (net) 485,213 - - 485,213 Total assets 1,045,368 - - 1,045,368 Deposits from customers 828,968 - - 828,968 Total liabilities 928,148 - - 928,148 Business Line segment Information regarding products and services are discussed in note 4 to these unaudited condensed financial statements. The results of each reportable segment have been presented in the financial statements as of 31 December 2012. 28
27 Capital adequacy ratio Details of capital adequacy, calculated in accordance with the norms prescribed by the Bank for International Settlements (BIS), are given below: Tier I and tier II capital 288,020 118,675 288,020 Risk-weighted assets 1,631,764 723,102 1,796,589 Capital adequacy ratio % 17.65% 16.41% 16.03% 28 Cash and cash equivalents Unaudited interim condensed balance sheet comprise: Cash and balances with central banks 248,230 46,791 120,540 Due from Banks 194,563 117,924 183,858 Due to Banks (34,151) (20,939) (46,170) 408,642 143,776 258,228 Adjustment for items maturing after three months from date of acquisition and restricted balances (15,885) (500) (15,885) Cash and cash equivalent comprise: 392,757 143,276 242,343 Cash and balances with central banks 232,345 46,291 104,655 Due from Banks 194,563 117,924 183,858 Due to Banks (34,151) (20,939) (46,170) Total 392,757 143,276 242,343 29